Death of a member

When a self-managed super fund (SMSF) member dies, the SMSF generally pays a death benefit to a dependant or other beneficiary of the deceased. This should be done as soon as possible after the member's death.

If the recipient is a dependant of the deceased, the death benefit can be paid as a lump sum or income stream. The income stream can be new or a continuation of an existing income stream.

If the recipient is not a dependant of the deceased, the death benefit must be paid as a lump sum.

Dependants

A person is a dependant of a deceased member if, at the time of death, that person was:

the deceased's spouse

a child of the deceased – this includes a child less than 18 years old or a child that was financially dependent on the deceased and less than 25 years old or the child has a disability

in an interdependency relationship with the deceased – this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.

For income tax purposes, a person is death benefits dependant of a deceased member if, at the time of death, that person was:

the deceased's spouse or former spouse

the deceased person's child, aged less than 18

any other person whom the deceased had interdependency relationship

Also included in the definition of a death benefit dependant is someone receiving a super lump sum because the deceased died in the line of duty as a:

member of the defence force

the Australian Federal Police

the police force of a state or territory

a protective service officer

or they are the deceased member's former spouse or de facto spouse.

Who to pay the death benefit to

The member may have made a death benefit nomination asking the SMSF trustees to pay their death benefit to their nominated beneficiaries.

The nomination may be binding or non-binding. While having regard to the member's nomination, the SMSF trustees must ensure the nominated beneficiaries are entitled to receive death benefits under the trust deed and super law.

If the deceased member did not nominate a beneficiary, the trustee may pay it to the deceased's estate for the executor to distribute it according to the instructions in their will.

Calculating tax on super death benefits

If the death benefit is paid as a lump sum to a dependant of the deceased, it's tax free. It's not assessable income or exempt income. The SMSF doesn't withhold tax from the payment and the recipient doesn't include it in their income tax return.

If the death benefit is paid as an income stream, or is paid to a non-dependent or the trustee of a deceased estate, there may be tax to pay. Your SMSF will need to determine the taxed and untaxed elements of the benefit, calculate the applicable tax and, if appropriate, withhold tax from payments.

Tax saving amount

A tax saving amount is an additional lump sum payment that increases the deceased member's lump sum death benefit to negate the effect of tax while the member's benefit was accumulating in the fund. It can be made to a:

trustee of the deceased estate

spouse or former spouse of the deceased

child (including an adult child) of the deceased.

The SMSF can claim an income tax deduction for the payment.

Note: From 1 July 2017, funds may only include a tax saving amount as part of a death benefit if the member has died on or before 30 June 2017. The fund must make this payment by 30 June 2019. From 1 July 2019, no tax saving amount will be available for funds members, regardless of when the member has died.

Video transcript – What happens when a member dies

We'd all rather not think about it, but you should know what will happen to your self-managed super fund if a member dies.

Bob and Greg are individual trustees of a typical SMSF. But what happens if Bob dies?

A legal personal representative is appointed as trustee for Bob and looks after his interest in the fund until his benefits are paid to his beneficiaries.

Then Greg must make sure the fund still meets the definition of an SMSF.

If the fund had a corporate trustee, it would remain an SMSF because Greg could be the sole director.

But because Greg is an individual trustee, the fund won't meet the definition of an SMSF.

To fix this, Greg could ask someone else to become a trustee, set up a corporate trustee and become its director, or transfer his super to another fund and wind up the SMSF.

Bob's death benefits must be dealt with as soon as possible.

If the fund has limited cash available, assets may need to be sold to pay the benefits.

SMSF members can nominate who will get their benefits when they die.

A binding death benefit nomination directs the trustee to pay the benefit to a legal personal representative or a dependant.

Without a binding nomination, the remaining trustees will decide how the benefits are distributed by considering the trust deed and super laws.

The trust deed must be followed, even if it is different to the member's will.

To understand how death benefits can be paid you need to know who is a dependant.

A dependant is generally a spouse, or someone in a close personal interdependent relationship. Or a child who is under 18, has a disability or is aged between 18 and 25 and is financially dependent on the deceased.

A dependant can be paid a lump sum or an income stream. A non-dependent can only be paid a lump sum.

Benefits paid as a lump sum to a dependant are tax-free but a lump sum paid to a non-dependant will be taxed.

Lump sums can be paid in cash or non-cash form, for example, shares or property.

The trustee may need to withhold tax from a death benefit. Working this out can be complex and will depend on a number of factors.

If a trustee has to withhold tax, they must register for PAYG withholding and complete some other ATO forms.

It's wise to plan ahead. If there is a dispute over the payment of death benefits which can't be resolved, it may lead to costly court action.

Clear guidelines in the trust deed will help prevent problems. An SMSF professional can help you get it right.

For more SMSF information, take a look at our other videos or at our other videos – or visit the ATO website at ato.gov.au

When an SMSF member dies, the SMSF generally pays a death benefit to a dependant or other beneficiary of the deceased. Your member’s benefits need to be paid out as soon as possible after the member’s death.

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If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.